Oct. 24 (Bloomberg) -- Federal Reserve Bank of New York
President William C. Dudley said the central bank wants to keep
mortgage interest rates from rising too much and may do more to
hold down borrowing costs.

The Fed’s decision last month to reinvest proceeds from
maturing housing debt into mortgage-backed securities was a
“signal that we do have concern about the level of mortgage
spreads,” Dudley said today. “Clearly we’ve indicated our
interest in supporting the housing market” and keeping yields
from “getting too elevated.”

Policy makers approved the action as part of an effort to
spur the economy with lower borrowing costs by replacing $400
billion of short-term Treasuries in the Fed’s portfolio with
longer-term bonds. The decision prompted dissents from three
regional Fed presidents: Richard Fisher of Dallas, Charles
Plosser of Philadelphia and Narayana Kocherlakota of
Minneapolis.

“We could move a degree more in that direction,” and
policy makers “do care about the level of housing
affordability,” Dudley said in response to audience questions
after a speech at Fordham University in the Bronx, New York.

Dudley said after a second speech before the Bronx Chamber
of Commerce that the Fed hasn’t “run out of bullets” and that
it has additional stimulus options, including extending its
commitment to keep interest rates low and embarking on a third
round of asset purchases. Clearing away obstacles to stimulus
would also make its record easing more effective, he said.

‘More Effective’

“To make monetary policy more effective it would be very
helpful” to remove “impediments” to the transmission of
monetary stimulus, Dudley said. For example, the Fed’s policies
have helped reduce mortgage rates, yet it’s difficult for some
borrowers to refinance their debt, he said.

Fisher said today the Fed’s so-called Operation Twist, in
which it swaps shorter-term debt with longer-maturity bonds to
push down long-term rates, isn’t showing signs of succeeding.

“It’s not clear Operation Twist works,” Fisher said to
reporters after a speech in Toronto. “The 10-year note is
actually backed up, not gone down.”

The yield on 10-year Treasuries rose one basis point to
2.23 percent at 3:22 p.m. in New York trading, compared with
1.86 percent on Sept. 21, when the Fed announced Operation
Twist. A basis point is 0.01 percentage point.

Separately today, the U.S. government announced that a
mortgage relief program will expand to allow homeowners to
refinance regardless of how much their houses have dropped in
value. The Federal Housing Finance Agency also said it will
eliminate some fees as part of the changes announced today to
the Home Affordable Refinance Program, or HARP.

‘Right Direction’

“I welcome this as a step in the right direction and hope
that more will follow,” Dudley said today in a speech to the
Bronx Chamber of Commerce.

Fed officials are developing options for further monetary
easing even as better-than-forecast economic reports have
allayed concerns the U.S. may relapse into a recession. Fed Vice
Chairman Janet Yellen said last week that a third round of
large-scale asset purchases “might become appropriate if
evolving economic conditions called for significantly greater
monetary accommodation.” Governor Daniel Tarullo said buying
mortgage-backed securities “should move back up toward the top
of the list of options.”

Offer More Clarity

Dudley said the Fed is also considering ways to offer more
clarity in public communication about when it plans to raise
interest rates. “This is something that we’re discussing but
it’s a fairly complicated question of how we actually represent
that in a compact way,” he said. “It’s hard to do that.”

The Fed pledged in August to hold interest rates near zero
through at least mid-2013.

That move, along with the decisions last month to shift the
Fed portfolio toward longer-term bonds and reinvest proceeds
from maturing housing debt into mortgage-backed securities,
“will be helpful in supporting growth and jobs,” Dudley said
in his speech. “However, I do not think that monetary policy is
all-powerful. To get the strongest possible recovery we need
reinforcing action in areas such as housing and fiscal policy.”

Bolstering the housing market is “particularly important”
because it’s a key factor in household wealth, he said. Home
prices in the U.S. were down 31 percent as of June from the peak
reached in June 2006, according to figures from S&P/Case-Shiller. A combined 5.23 million new and existing homes were
sold in 2010, a 13-year low and 37 percent fewer than the record
8.36 million bought in 2005.

‘More Defaults’

“Continued house price declines could lead to even more
defaults, foreclosures and distress sales, undermining wealth,
confidence and spending,” Dudley said in his speech. “Breaking
this vicious cycle is one of the most pressing issues facing
policy makers.”

The average interest rate on a typical 30-year fixed-rate
home loan declined to 4.17 percent on Oct. 21 from 5.06 percent
in February and reached a low of 4 percent earlier this month,
according to Bankrate.com data.

Still, sales of previously owned homes fell 3 percent last
month to a 4.91 million annual rate, matching the median
forecast of economists surveyed by Bloomberg News, figures from
the National Association of Realtors showed last week. The
median price dropped 3.5 percent from a year ago and about one
in five real-estate agents polled said contracts had been
canceled, the group said.

“If prospective homeowners no longer fear that prices
could decline further, they will be more willing to enter the
market to take advantage of reduced prices and low financing
costs, and existing homeowners will feel more confident about
spending,” Dudley said. “A vicious cycle could be replaced by
a virtuous circle, in which stabilization in house prices
supports spending, growth and jobs.”